The bottom line

The US economy is in decent shape heading into the election, bolstered by robust consumer spending, fading inflation and steadily less restrictive monetary policy. Higher tariffs and the expiration of tax cuts are key risks to the outlook, but budget deficits and narrow majorities in Congress will act as policy constraints.

A strong economy awaits the next president

The next US president should inherit an economy with firming activity and declining inflation, although price levels remain uncomfortably high for many Americans. The unemployment rate has been rising in 2024 as job creation has slowed, but remains low by historical standards. The misery index—the sum of the unemployment and inflation rates—rose throughout much of the Biden/Harris administration to levels not seen since the financial crisis but has since settled back as inflation has cooled (see Figure 4). It is in this context that the Fed sees the risks to the economy as roughly evenly balanced and is expected to gradually reduce the fed funds target rate until its policy stance is back to neutral.

Scenario 1: Divided government limits deficit expansion

The fiscal impact of a Harris presidency under a divided government appears mixed. Proposed higher corporate income tax rates are a nonstarter for a Republican-controlled Senate. Likewise, a divided government would also seek to limit deficit-expanding tax cuts and growth in federal spending. Her administration would likely allow personal income tax rates to rise for upper-income households when the 2017 tax cuts expire at the end of 2025. However, rather than deficit reduction, revenues raised on upper-income households could be used to offset the spending associated with an expansion of the Child Tax Credit, a goal which has seen some bipartisan support. A Harris administration would retain similar national industrial policy goals and associated IRA spending from the current administration, but it would resort to tariffs less systematically than a Trump presidency. A status quo regulatory environment could even turn toward deregulation as courts take on more responsibility in a post-Chevron world.

Scenario 2: A different starting point under Trump 2.0

Meanwhile, the fiscal impact of a Red sweep is not obviously stimulative and could even prove contractionary if imposed tariffs are high and wide-reaching. Recall that during Trump 1.0, tax cuts came first and then tariffs followed. Moreover, the economy was strong enough in 2017 that the Fed had already begun lifting interest rates from the zero lower bound and embarked on efforts to reduce its balance sheet to remove accommodation. By the time tariffs were imposed in 2018, businesses and households had been experiencing an expansion in post-tax earnings.

Under Trump 2.0, proposed tariffs are much larger and would likely arrive well before the extension of personal income tax cuts, which expire at the end of 2025. Furthermore, unlike the 2017 tax cuts, extending existing personal income tax cuts provides no additional fiscal boost to the economy; it merely maintains the status quo. Because a full extension of the tax cuts would produce higher sustained deficits, Trump’s other tax cut proposals—such as lowering the corporate tax rate and eliminating taxes on Social Security, tips and overtime pay—are unlikely. The same is true for large spending initiatives. Small fiscally conservative minorities within the Republican party may be able to thwart or scale back legislation under reconciliation given razor-thin majorities in Congress, while ordinary budgets will require 60 votes in the Senate and therefore bipartisan agreement.

Deregulation could yield modest economic gains by expanding the supply side (think energy), but forced deportations would reduce the labor supply and, together with tariffs, could lift inflation and limit the degree of Fed rate normalization.

Fiscal sustainability the biggest loser of this election

Fiscal deficits are projected to remain elevated during the next administration, regardless of which candidate wins the election, because both prioritize extending the majority of the tax cuts passed in 2017 (see Figure 5). Divided government may act as more of a governor on the growth of deficits than united government, but growth in debt as a share of GDP over the course of the next administration appears highly likely. The two candidates’ policy proposals would have varied impacts by income group if enacted, but the devil, as always, is in the details. Higher tariffs on basic goods are a regressive tax increase, the child and earned income tax credits are aimed at reducing poverty, and higher-income households could see their personal income tax rates rise if their tax cuts are not extended.

The outcome of the US election could bring short-term fluctuations to currency and commodity markets. However, it does not alter our long-term outlook for a weaker US dollar (USD) or higher commodity prices. Not all currencies and commodities are equally sensitive to the US election outcome, with the Chinese yuan most at risk, while gold remains a good geopolitical hedge.

The US Federal Reserve embarked on rate cuts in September 2024 with a 50-basis-point cut and will likely further normalize monetary policy in coming months. That US dollar-denominated assets paid the highest yield among G10 countries was a key supporting factor in the USD’s lofty valuation. Falling rates in the US should consequently reduce the USD’s attractiveness in coming quarters. The election outcome is likely to lead to short-term volatility in currency markets, and a Trump victory could lead to a short-term rebound of the USD, mainly versus pro-cyclical currencies including the Chinese yuan.

Even under a Trump administration, we do not expect the USD to hold onto current high valuations for long, as tariffs are unlikely to be USD-supportive over the medium term. Our analysis shows that universal tariffs would hurt the US economy more than the economies of its main trading partners over the medium term. This should lead to a further reduction of US yields, inducing further USD weakness in the mid-single digits. The trade-weighted dollar could slip below the 100 mark in 2025 (see Figure 6).

As for commodities, we expect the broad commodity index (UBS CMCI index) to rise around 10% over the coming 12 months thanks to falling nominal and real interest rates. Slowing inflation, central bank rate cuts, and China’s increased efforts to stabilize growth should help manufacturing recover globally, which favors cyclical commodities.

The supply conditions of cyclical commodities are generally constrained owing to a lack of upstream capacity (like for copper or zinc) or because of producer limitations (like for crude oil). Moreover, inventories of key commodities are not plentiful. We therefore expect prices to rise as stocks are drawn down further. The US election result is unlikely to change this broader macro narrative or the supply stories of the individual commodities.

Tariff risks under a Trump presidency would bring growth uncertainty for China. Its economy is heavily dependent on global trade, so it may be obliged to respond to US tariffs with even greater stimulus to shield its economy. On balance, a tariff-induced pullback in commodities could prove short-lived and limited in size. A Harris win would largely be a non-event for the asset class, in our view. Prospects for divided government under Harris would limit deficit expansion, supporting the current expectations for rate cuts in the US. Abstracting from all this, in our base case we expect crude oil to trade at USD 85/bbl next year and copper at USD 12,000/mt.

With gold also benefitting from lower opportunity costs and uncertainty, we believe the metal can remain an effective hedge against geopolitics. Although a stronger US dollar in a Trump victory could initially burden gold, we believe any price pullbacks would be quickly bought considering the USD’s rich valuation and the US’s longer-term deficit challenges. Many investors are using gold as a way to diversify their USD-related exposure. We therefore reiterate our view of the gold price reaching USD 2,900/oz in 2025 and see the entire precious metals sector being well bid.

While interest rate volatility will remain heightened into the election, we anticipate lower yields in 2025. The deficit will become a focus later in the year, but it is secondary to growth and inflation. However, increased net Treasury supply in 2025 will raise the importance of the Fed’s balance sheet decisions. The election may stoke volatility, but we would take advantage of large moves in either direction.

Interest rate volatility has increased over the past year as the Fed shifted its focus from price stability to full employment. With its dual mandate in better balance, and with expected real GDP growth likely to hover around 2.5% in 2024 and 2025, we anticipate the Fed to gradually cut rates to near 3.25%. As growth and inflation normalize and the Fed moves from a restrictive to a neutral policy stance, we expect interest rates to trend lower over the next year, reaching 3.5% by June 2025, as well as a further steepening of the yield curve. While interest rate volatility should eventually decline, we anticipate it remaining heightened in the near term thanks to the upcoming election and the potential for sustained deficit spending and potentially growth-dampening policies like tariffs.

We see growth, inflation, and monetary policy as the primary drivers of US interest rates and the yield curve shape. While investor sentiment may influence short-term trends, it is not a primary driver of rate paths. However, sentiment combined with unexpected growth and inflation can cause short-term volatility, particularly in the longer end of the yield curve where investors expect compensation for risk. Abrupt moves, as seen in October 2023, are unusual and tend to be short-lived.

The US federal budget deficit stands at USD 1.8 trillion, according to a September 2024 Congressional Budget Office estimate. Rising deficits lead to increased Treasury supply, which can influence investor sentiment if supply-demand imbalances emerge. A study by the Committee for a Responsible Federal Budget (CRFB), a nonpartisan fiscal policy research firm, estimates the base case cumulative deficit under Harris’ policy proposals at USD 3.5 trillion over 10 years and USD 7.5 trillion under Trump. Relative to the deficit’s current size, the annual changes to the deficit under both candidates look manageable.

The 2024 federal budget deficit has grown to 5.6% of GDP. A range of studies shows a one percentage point increase in the deficit-to-GDP ratio corresponds to a roughly 10- to 20-basis-point increase in 10-year yields. The same CRFB study forecasts an increase in the deficit-to-GDP ratio to 8.1% under Harris and 9.6% under Trump by 2035, which would equate to a 5- to 8-basis-point increase in 10-year yields per year. Historically, as shown, there is a low correlation between budget deficits/surpluses and changes in the 10-year Treasury yield (see Figure 7).

These smaller increases are part of a larger issue regarding the deficit and upcoming supply, as 50% of government debt is set to mature by 2026. However, increased supply is secondary to economic fundamentals. With positive demand from foreign holders, households, and banks, and the expected end of quantitative tightening, the supply-demand overhang from increased Treasury issuance is unlikely to materially affect Treasury yields unless accompanied by unexpected growth and inflation shocks.

A further key consideration on the expected increase in net Treasury supply in light of the elections and current fiscal backdrop is how the Fed manages its balance sheet. The overall large increase in Treasury supply during the COVID pandemic was more than absorbed by the Fed through asset purchases and balance sheet expansion. Since 2022, the Fed has been gradually reversing this through quantitative tightening (QT). Widening deficits on top of reduced Fed holdings of Treasuries means the net supply needs to be absorbed by the private sector. This ultimately results in a drain on reserves in the financial system.

The Fed has been preemptive to avoid a sharp tightening in funding markets or a repeat of the 2019 volatility that occurred after its first round of QT. The Fed has already reduced the pace of balance sheet reduction and has completed an analysis of the conditions that would warrant ending QT. These discussions are likely to continue into 2025, with the endgame being a much larger Fed balance sheet and holdings of Treasuries than before the pandemic. This would put a lid on term premium and the extent to which long-term rates can be influenced away from the macroeconomic fundamentals and policy rate changes.

Market sentiment affects short-term trends: a Red sweep could cause a knee-jerk reaction of rising yields, while a Harris victory under divided government might lead to lower yields. However, we would take advantage of large market moves in either direction in this roughly balanced economic outlook we foresee, resulting in a 3.5% 10-year yield and a 3.25% two-year yield by mid-2025.

Despite the volatile and often heated rhetoric of the US election campaign, it is unlikely that the election outcome will derail the drivers that have propelled global stocks higher over the past two years. Even in the context of election uncertainty, we continue to view global equities as attractive. Still, the election could create short-term volatility, and investors can consider hedges to insulate portfolios.

A constructive backdrop

Over the past two years, global equity markets have posted strong returns. Since the end of the third quarter of 2022, the MSCI All County World index has risen by 61%. US large-cap markets have performed even better, with the S&P 500 up 67% and the Nasdaq Composite up 76%. These strong returns are a function of a supportive backdrop for stocks driven by durable economic and corporate profit growth, falling global inflation, central bank rate cuts, a boom in artificial intelligence (AI) investment, and more recently, stimulus in China. In our view, these favorable drivers remain largely in place and should continue to push markets higher in the coming months.

Yet at the same time, investors now have to grapple with the uncertainty of the upcoming US election. As we have highlighted previously, potential policy changes are just one of the many factors that influence equity market returns. In this context, we do not expect the election result to derail the bull market drivers enumerated above. Regardless of the result, we expect steady US economic growth, central bank rate cuts, and further strong AI spending as big tech companies jockey for leading positions and companies as well as consumers begin to adopt the technology.

However, election results can drive short-term financial market volatility, especially if investors are surprised by the outcome. But elections also tend to mark the end of policy uncertainty, which can be positive for stocks (see Figure 8). After all, investors do not like uncertainty and elections can provide more clarity about the policy road ahead.

While the two presidential candidates offer divergent views on many important issues, their economic policies will be constrained by the makeup of Congress and persistent, large US government budget deficits. While the outcome of the presidential election is essentially a coin flip, it seems likely that Republicans will gain control of the Senate. So a potential Harris victory will be somewhat of an extension of the status quo: a Democratic White House with a divided Congress. We therefore do not expect significant US economic policy changes in a Harris win, so this outcome would likely have minimal impact on US equities. However, non-US equity markets could experience a “relief rally” as investors would not have to worry about the possible negative impacts of Trump’s tariffs.

In a Trump victory, Republicans have a strong shot at controlling both chambers of Congress. This scenario would lead to potential policy changes that create a number of crosscurrents. Equity investors would likely cheer Trump’s deregulation leanings and the prospect that expiring tax cuts on households will be extended beyond the scheduled sunset at yearend 2025. However, the cost of extending these tax cuts will be large, which makes it hard to envisage any incremental reduction in US corporate tax rates. Furthermore, investors will have to contend with potential sweeping tariffs and retaliatory measures from trading partners. As a result, both US and non-US stocks that are leveraged to trade or have significant operations in US and non-US jurisdictions could experience heightened volatility.

The bottom line is that despite the election uncertainty, we continue to expect further gains in global equity markets in the coming months. Within equities we have Most Attractive views on AI, Taiwan, and US tech. But we acknowledge that elections can drive volatility. Investors may therefore want to consider hedges in order to dampen any potential short-term adverse market moves.

Sectors

The election outcome could create some divergences between sector performance. But as we have highlighted previously, the election is just one of many factors that could have an impact on sector performance. Below, we highlight our current positioning and how the election outcome could affect sector performance. We focus on the two most likely outcomes: a Harris win with a dividend Congress and a Trump win with a Republican Congress.

Communication Services: Our Attractive view on the sector is underpinned by solid growth in digital advertising and benefits from AI adoption for the consumer internet companies that dominate the sector. While the sector should be largely unaffected by the election, there is a small chance in a Trump victory that Internet companies could lose immunity protections for content posted on their platforms. But it will likely be hard to get this change through a Senate with a slim Republican majority.

Consumer Discretionary: We have an Attractive view on the consumer discretionary sector. Ongoing Fed rate cuts should bolster consumer spending and could lead to an improvement in housing and automotive markets. In addition, Amazon—which accounts for 35% of the market value of the sector—has tailwinds from AI adoption. A potential Harris victory would likely have minimal impact on the sector. In contrast, a Trump victory could present some headwinds owing to tariffs on imported goods.

Consumer Staples: Our Neutral view of the sector is based on expectations for continued sluggish volume trends for large segments of the sector offset by solid fundamentals for the largest retailers in the sector. In addition, this defensive sector often lags in a bull market.

Energy: Our Neutral view is predicated on expectations that oil markets remain well-supplied with substantial OPEC spare capacity. A Harris victory would likely be an extension of the status quo and have a limited impact on the sector. A Trump victory could lead to some regulatory relief but with companies focused on capital discipline, significantly more drilling activity in the US is unlikely. Further, OPEC remains interested in returning barrels to the market that were removed in 2023 to balance supply and demand. As a result, we don’t see a material benefit for the sector in a Trump victory scenario. We expect recent LNG expansion restrictions to lapse in either outcome.

Financials: We have an Attractive view on the financials sector driven by the positive impact of Fed rate cuts, which should lower funding costs and lead to a pickup in activity spanning business lending, M&A, and capital markets (public equity and debt issuance). A Harris victory would likely be an extension of the status quo and have minimal impact on the sector. In contrast, the sector could be a key beneficiary of a Trump victory, which would likely lead to looser regulation and faster earnings growth for the banks.

Healthcare: Our Neutral view on the sector is driven by revenue headwinds from drug patent expirations for many of the pharma companies and a challenging environment for managed care companies. This is offset by good growth in medical devices, improving end markets for life science tools, and growth in obesity therapies. The biggest election risk for the sector is further drug price regulation in a Blue sweep, but this outcome is unlikely. A Harris victory would likely extend the status quo. A Trump win could lead to a slightly better environment for managed care companies.

Industrials: We have a Neutral view on the industrials sector. Companies are benefitting from secular themes, such as reshoring, aerospace demand, infrastructure, and investment in energy infrastructure driven by renewables and AI power demand. While manufacturing and goods demand could improve, it will likely be slow and valuations already seem to reflect some improvement. There are some companies in the sector leveraged to Inflation Reduction Act spending, but they are not large enough to affect our view of the sector in a Harris win (which would lead to continued support for these policies) or a Trump victory (whereby support could be scaled back). Imposition of tariffs in a Trump victory would likely be a headwind for the sector.

Information technology: Our Most Attractive view on the sector is driven by our expectations for continued strong earnings growth driven by the buildout of AI infrastructure and the adoption of AI applications. Other key end markets such as personal computers, smartphones, and servers should also improve. A Harris victory would likely have minimal impact on the sector. In contrast, the imposition of tariffs in a Trump victory could crimp earnings growth for the hardware segments of the sector and therefore our upside expectations.

Materials: We have a Neutral view on the materials sector. China’s stimulus is supportive but may not significantly improve the sector’s growth outlook. Chemicals companies are still contending with substantial global supply additions. A Trump victory could benefit the sector as policy that favors domestic activity is put in place. A Harris victory would likely extend the status quo.

Real estate: Our Neutral view is driven by overcapacity in key segments of the sector, such as industrial and multifamily, which may take some more time to absorb. Growth in funds from operations will likely lag S&P 500 profit growth in 2025. While Harris has proposed some measures that could spur additional housing demand, home builders are not part of this sector and are just a fractional component of consumer discretionary. Stocks in the sector could face incremental headwinds in a Trump victory owing to higher interest rates, which is a key driver of sector valuations.

Utilities: Our expectations for a pickup in power demand growth owing to the build-out of AI data centers drives our Attractive view. The sector should be largely unaffected by the election outcome, although a Harris victory could prompt a relief rally in some of the companies leveraged to renewables. Even though a second Trump administration might scale back some federal support for renewables, demand would likely remain unchanged as companies and state and local governments pursue decarbonization goals.

An improving global growth and liquidity backdrop benefits emerging markets. China’s stimulus and Federal Reserve rate cuts are leading to less restrictive global financial conditions at a time when emerging markets already offer value. Although the stars are aligning for emerging market assets, one key uncertainty remains: the US election.

Chinese policymakers recently announced measures to support the economy, with more announcements still to come. The People’s Bank of China cut policy rates and signaled further easing ahead. Improved rules for mortgage refinancing, lower down payment thresholds for second homes, and a significant liquidity boost for equity markets were introduced. China’s Politburo emphasized the need for “necessary fiscal spending” to meet this year’s 5% real GDP growth target. These decisions reflect a strong determination to put a floor under the Chinese economy, which also benefits broader emerging markets.

While these events are supportive for emerging market assets, the US election outcome poses a potentially large risk. Regardless of the outcome, Congress is likely to sustain its bipartisan support for efforts to contain China’s military and economic rise. A Harris administration represents a continuation of the status quo. But a Trump administration raises uncertainty, given his preference for tariffs as a national economic policy tool and his more unilateral and isolationist approach to foreign policy.

Investors are often hesitant to increase allocations to emerging markets amid trade and geopolitical uncertainty given past performance challenges (see Figure 9). China and Mexico, for instance, are particularly vulnerable to shifts in US policy given their deep economic linkages and the heated rhetoric on the campaign trail. While the US election outcome is important, long-term portfolio construction should remain apolitical. Emerging market assets should play a central role in portfolios, promoting geographic diversification and improved risk-adjusted returns.

Emerging market US dollar-denominated bonds, for example, offer interest rates of 6.5-7.0%, well above that of US high-yield bonds even though the majority of emerging market issuers are rated investment grade. We expect emerging market bond spreads to remain stable over the next six to 12 months, allowing investors to achieve high-single-digit returns. Emerging market bonds also provide broad diversification across countries, limiting exposure to countries in the crosshairs of US tariff policy.

Regarding emerging market stocks, it’s important to remember that asset performance depends not only on actual outcomes but also on what is already reflected in the price. Emerging market equities currently trade at a 12.5x 12-month forward price-to-earnings ratio, a 40% discount to US stocks. While we remain constructive on US equities, investors underallocated to other regions may want to consider aligning with their strategic benchmarks. In a complex geopolitical world, exposure to markets with lower correlation to typical US holdings is beneficial. The potential for USD weakness owing to Fed cuts further supports the case for non-US asset allocations.

The US election outcome may create headline risks for sustainable investing, particularly in energy transition and decarbonization strategies. Despite short-term volatility, the overall trend in sustainable investing is expected to remain stable, driven by climate risk and energy diversification. Falling interest rates will support these strategies, though a Red sweep could bring federal restrictions on incorporating ESG factors in investment strategies.

Sustainable investing spans asset classes and is more influenced by the macro environment than specific White House policies. For investors with long-term objectives, including sustainability objectives, we recommend maintaining exposure in line with your strategic asset allocation. Near-term volatility might create entry opportunities in some areas.

Inflation Reduction Act, fossil fuel industry, and clean tech

The election outcome is unlikely to significantly affect fossil fuel or renewable energy companies. The Inflation Reduction Act (IRA) has boosted investment in wind and solar, with capacity increasing over the past two years. Valuation measures of an index tracking clean energy stocks have declined from 2021 highs and stabilized at a standard deviation below the historical average (see Figure 10). Falling interest rates are expected to support these sectors, although we are unlikely to see an immediate impact. Additional Environmental Protection Agency action aimed at the fossil fuel sector is expected to be limited under a Harris administration, given the Supreme Court’s overturning of Chevron deference.

AI security, diversity and inclusion-focus, affordability

We do expect more divergence between the two administrations on the socially focused areas of policymaking in ways that could have implications for investors. A focus on increased scrutiny of AI models from a transparency and security perspective is likely bipartisan, with additional guidelines expected from both administrations. The Harris campaign has emphasized policies on housing affordability; however, much remains to be seen about the implementation of such policy proposals. A Trump administration may increase legal risks for companies focusing on workforce diversity, potentially leading to a corporate shift away from diversity targets. However, evidence suggests diversity enhances innovation and performance, prompting companies to focus on human capital and retention.

ESG and sustainable investing

While the debate on sustainability unfolds at the federal level, much of the related legislative activity has been at the state level over the past two years. A mix of both “anti” and “pro” ESG laws at the state level combined with recent underperformance have driven asset managers in some strategies focused on “SI” or “ESG” labels to tone-down marketing on these topics. Despite this, sustainable investing will continue to offer choices for investors, though “greenhushing” (understating sustainability practices) is likely to persist in the near term. We recommend that investors focused on sustainability continue to look beyond marketing and labeling, at the intentionality of investment strategies, and at the underlying thesis for these opportunities.